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Hidden Stocks for High Returns

These underrated stocks could be tomorrow's big winners.

Like the song says, investors are looking for stocks to love in all the wrong places. They'll pile into the momentum stocks everyone else buys but ignore lesser-known opportunities for fear of straying from the crowd.

Yet the search for undiscovered jewels has informed many of our Motley Fool Hidden Gemspicks, from Dawson Geophysical to Sotheby's. Overlooked by Wall Street and Main Street, and thus undervalued, these stocks hold the best potential to deliver outsized returns.

The Motley Fool CAPS community knows a bargain when it sees one. Below, you'll find several under-the-radar stocks that brim with promise. These companies have garnered 100 or less active recommendations on CAPS, though the community thinks they still have outsized potential.

Stock

CAPS Rating(out of 5)

No. of Active Picks

Est. EPS Growth Next Yr.

CBOE Holdings(Nasdaq: CBOE)

*****

72

16%

Magellan Petroleum(Nasdaq: MPET)

*****

60

NA

Neostem(NYSE: NBS)

****

56

51%

Source: Motley Fool CAPS; NA = not available.

Naturally, we want you to look a bit closer at these stocks before buying. Maybe investors are staying away from these stocks for a reason so make sure there's nothing seriously wrong with the company before you plug it into your own portfolio.

Blinded by the lightIt looks like NYSE Euronext(NYSE: NYX) is the only prize worth pursuing in the exchange consolidation race, leaving options trading house CBOE Holdings out in the cold.

Investors responded to the news that both Nasdaq OMX Group(Nasdaq: NDAQ) and IntercontinentalExchange made an $11.3 billion bid for the New York Stock Exchange owner by dropping the futures exchange operator some 5%. Everyone was expecting them to make a pitch for CBOE rather than try to wrest the bidding war away from Deustche Bourse.

Although the immediate effect was to sell off CBOE's shares, the options exchange is still seen as profiting handsomely as a standalone company. That means that whichever exchange becomes the failed bidder for NYSE could turn around and make a new bid for CBOE. The game's not over 'til it's over. That could be why everyone from Wall Street to Main Street on CAPS has rated the futures trading shop to outperform the broad market averages.

Under the radarSwitching from a traditional, smaller volume energy production company into a developer of larger-scale reserve positions hasn't been an easy transition for Magellan Petroleum. Sales fell sharply in the latest quarter, which led total revenue for the quarter to drop 53% to $4.5 million. Meanwhile, costs and expenses rose 5% to $8.2 million. Oil sales were down, too.

The company's principal asset is its 51% equity interest in its Australian subsidiary that has two petroleum production leases. Magellan is facing stiff competitive pressures from Italian oil and gas producer Eni, which has production facilities in Australia's Blacktip field in the Timor Sea. When Eni ran into delays in developing the field, Magellan began supplying its biggest customer, Power & Water. Now that Eni is producing from the field, it's finding that competition for the sale of its remaining uncontracted reserves is tough. The hope is that long-term mining interests in Australia will increase demand for its reserves.

CAPS member WPThatcher admits the E&P play is speculative, but with only one CAPS member thinking it can't outperform the indexes, he's got good company. Circumnavigate the Magellan Petroleum CAPS page and leave your thoughts on whether it can grow down under.

Divine interventionWhat sets Neostem apart from rivals StemCells(Nasdaq: STEM) and Cytori Therapeutics(Nasdaq: CYTX) is its pursuit of a proprietary population of adult stem cells known as very small embryonic-like stem cells, or VSEL. It's unique because it uses an individual's own adult stem cells that have characteristics of embryonic ones, making engraftment faster, safer, and cheaper. There's also no concern they'll be rejected by the body as may occur when using someone else's.

While Lloyd Blankfein may have thought Goldman Sachs was doing God's work, Neostem apparently actually is. No less than the Vatican has taken a financial position in the stem cell researcher, because its VSEL technology does not carry the moral baggage that embryonic stem cells do. CAPS member GasparOP finds that a compelling reason to think Neostem can succeed:

Neostem is making serious medical progress in an area that is right now cutting-edge and will later be commonplace, fitting my investment philosophy completely, It uses adult stem cells, which is encouraged by Catholic social teaching (the Vatican has a $1 million stake in the company).

Also, it has Chinese exposure, but it isn't totally dependent on them. It's making good acquisitions and being patient. Profitable within two-three years; stock could rise tenfold.

Although there's strong bullish sentiment on CAPS that Neostem can beat the indexes, you can watch how the investment plays out by adding the researcher to the Fool's free portfolio tracker.

Keep a high profileWe've had three stocks today that hold a lot of promise that investors want to get behind, but possess equally persuasive arguments for swearing them off. It's why you need to look beneath the headlines and press releases to get a fuller picture of where your money is going.

Also check into Motley Fool CAPS and tell us whether these low profile stocks are on their way to higher returns.

Author

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow him on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.